1. The Field of the Invention
This invention relates to systems, methods, and computer program products for debt reduction.
2. Background and Relevant Art
Monetary debt, which and entails paying for an item at a later date, is a growing problem for many people. For example, a consumer can now finance any number of secured debts, such as homes, cars, property, expensive goods, as well as unsecured debts, such as items purchased through a credit card or line of credit, education loans, etc. In each case, paying for the item at a later date can add to the expense of the item, and therefore create an unanticipated financial burden on the user.
In particular, most debts require that the consumer pay back the debt with a certain amount of interest that is amortized over time, making the items far more expensive in the long-run than when purchased initially. As shown in FIG. 1, for example, a user (100) may purchase an item (e.g., a home 105) for a principal amount of $100,000 (117) by asking a lender (110) to finance the item (105) at a certain interest rate (118), such as an interest rate of 5%, amortized over 30 years. Using a simple interest calculation, the monthly payment (120) of principal (117) and interest (118) on such a purchase would be approximately $540, with the total amount paid on the loan being approximately $194,000. After making the final payment in the 30 year period, the user will have paid almost double ($194,000) the amount of the initial purchase ($100,000).
In some cases, the financed items will appreciate in value over time, such that the value of the item is still greater than the total amount paid in the end. This, however, is not the case for many other depreciating items, such as debts to purchase cars, clothing, food, etc., which lose value with use over time In particular, depreciating items are typically not worth the amount paid for them with interest, especially at the time the consumer makes the last payment on the debt. For example, a payment of $100 in clothing (e.g., one or two pairs of pants) could accrue approximately $20 in interest assuming conventional interest rates, and assuming conventional minimum monthly payments. Thus, the used clothing is usually worth far less than paid initially by the time the final payment has been made (roughly a year in this example). This problem becomes far worse when the consumer fails to make timely payments, and hence incurs additional fees and interest rate increases.
Accordingly, it is ideal in many cases to purchase an item up front, rather than paying at a later date (i.e., financing the item). While this sort of monetary discipline can be exercised for many types of wanted items, there are some necessary items that cannot ordinarily be purchased by most consumers without incurring at least some debt. For example, most people do not make enough money, or have enough cash on hand, to purchase a home with without incurring at least some debt.
Furthermore, many people cannot afford even to purchase a home with financing that allows the home to be paid off within a relatively short time to minimize their interest payments, such as a time period of 10–15 years. In particular, short term loans, such as 10–15 year home loans, typically require a high monthly payment. This can be particularly difficult for a user since mortgage payments are usually required in a single monthly payment, such that the user cannot spread the total monthly payment in two partial payments, consistent with the user's bi-weekly paychecks.
Thus, it is fairly common for users to purchase a home with financing that allows the home to be paid off within approximately 30 years. While this provides the benefit of a relatively low monthly payment, the total interest paid on the home is extremely high, often twice the value of the home. Furthermore, this means the user is likely to hold a significant amount of debt on a home up until (or just after) the user is ready to retire, depending on when the user purchased the home.
Accordingly, some programs have been developed to help ease the debt burdens some users may face with large loans. In particular, some programs, such as bi-weekly payment programs, offer a person to pay down a debt, such as a home debt, more quickly than possible under a 30-year loan, without significantly burdening the user's monthly budget.
For example, assuming a monthly mortgage costs $1,000 for a user. A bi-weekly program might allow the user to pay $542 every two weeks, such that the user has overpaid by $84 each month. The program administrator saves the extra $84 until $1000 has been saved up, and then makes an extra payment into the loan at the end of the year. Making an extra payment such as this has been shown to reduce the total term of the loan from approximately 30 years to approximately 22 or 23 years, representing a significant interest savings for the user.
Unfortunately, payoff periods of 20 or more years can still represent a significant burden to many users in terms of time and cost, particularly those users who delay purchasing a home until they are somewhat advanced in age. For example, users who purchase homes while in their forties will still be paying down the debt as they approach retirement. Furthermore bi-weekly programs are not typically cost-free. With reference to the prior example, the program administrator might require the user to pay $684 per check (rather than $584) to operate the program, such that the user pays an additional approximately $200 a month ($100 extra every two weeks) in service fees.
As such, in some cases, a user may believe that the benefits of reducing the term of the debt from 30 years to 20 years is difficult to justify compared to the burden of paying extra service fees with the reapportioned loan amounts each month. For example, biweekly programs, with their service fees, may be too expensive for some users who struggle to pay even the standard monthly debt payment. Still further, bi-weekly programs generally require a person to make additional efforts with their loans, after having spent considerable effort negotiating, procuring, and signing the original home loan.
Accordingly, an advantage in the art can be realized with systems, methods, and computer program products that help a user pay off large debts in a relatively short period of time, such as paying off a home debt in less than 10 years, without substantially burdening the user's monthly budget for other expenses.